A R150bn annual ‘bonsela’ for elites gaming SA’s ludicrous BEE laws

Economic issues only tend to grab attention when their consequences have a direct impact on our pockets. South Africans are in one of those rare moments right now after the ANC was blocked from jacking up VAT from 15% to 17% to fund an increase for public sector employees who already receive the highest share of tax in the world. So a World Bank report quantifying the economic cost of SA's massive 'BEE premium' put this elite-benefitting policy into the spotlight in a country where Black unemployment has risen from 6m to 11m since 2007. In this fascinating interview, Gabriel Crouse, a fellow at the prestigious Institute of Race Relations, estimates that ending BEE would enable VAT to actually be cut to 11.5%. Notably, the BEE Scam was also highlighted by the Zondo Commission. Crouse spoke to BizNews editor Alec Hogg..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here..If you prefer WhatsApp for updates, sign up to the BizNews channel here..Watch here.Listen here.Edited transcript of the interview ___STEADY_PAYWALL___.Alec Hogg (00:05.573):The last time we spoke with Gabriel Crouse, he gave us some very good insights into the actual ownership of land in South Africa, dispelling the myth that 70% of the land is owned by whites. That claim came from a selective reading of research, which essentially took one-third of the number and extrapolated it. We're going to do some more myth-busting today when we talk about BEE, especially in light of the results from a recent World Bank research report on how to get South Africa going again..Alec Hogg (00:47.259):Gabriel, thank you for joining us. Is this your day job—looking at difficult subjects, researching them, and sharing your insights with the rest of us?.Gabriel Crouse (00:56.298):Yes, it's certainly a big part of my work, and it's something I really enjoy. I think South Africa's underperformance is not due to a lack of goodwill but rather a lack of good insight. So sharing facts, I believe, is very helpful for our country..Alec Hogg (01:12.55):Regarding the World Bank report, how much time did you spend on something like that to fully understand what they're trying to tell us?.Gabriel Crouse (01:21.578):The report itself is pretty short to read, though there are some additional documents that are a bit longer. I didn't attend the media junket last week, but I spoke with people who were there. Let's say I spent about a day on the World Bank report itself. However, to fully understand it in context, you need to look at previous work by the World Bank and other organizations. It's taken years to piece together how we've arrived at this point..Alec Hogg (01:52.008):What's interesting about the World Bank report is that it's not an isolated recommendation to revisit the BEE regulations and legislation in South Africa. Harvard University had something similar, the International Monetary Fund (IMF) said the same thing, and the Zondo Commission also recommended a similar course of action, as you mentioned in your piece yesterday. You talk about a "BEE premium," and I think that's something we should unpack. Right at the outset, what exactly is it?.Gabriel Crouse (02:26.038):So, Willie Mathebula, the Acting Chief Procurement Officer of Treasury who oversees around 1.2 trillion rand in spending, has explained that a BEE premium is the legal amount that the government can pay extra to procure from a racially preferred supplier. For example, in a Value for Money report from the City of Cape Town, two suppliers were willing to sell traffic light controllers for about 70,000 rand each. One supplier was the original manufacturer, while the other was selling exactly the same product but with higher BEE points. Because of the BEE points, the original supplier didn't get the tender, and the second supplier sold the same item for 7,000 rand more. That's a BEE premium of about 7%..Mr. Mathebula has clarified that BEE premiums are capped at 25% for contracts under 50 million rand and at 11.1% for contracts over 50 million rand. So, if you have a 100 million rand contract, you can legally pay an extra 11.1 million rand for the same goods or services, just because the company has a higher BEE score. And that extra payment is legally required unless Treasury grants an exemption..Alec Hogg (04:11.744):So, this is part of South Africa's rule of law. It's embedded in our legislation, and it's one of the hotly debated issues, especially considering that the country is facing financial strain. When you look at that BEE premium, where does that extra money go? For instance, on a 100 million rand contract, that 11 million rand is money that taxpayers are paying extra. Where does it end up?.Gabriel Crouse (04:41.984):Well, the company that wins the bid gets that extra amount, but the real question is: are we getting the maximum value for that money? Is it boosting productivity and contributing to the economy in a meaningful way? The answer is no. One of the key metrics economists use is the "fiscal multiplier.".For example, the South African Reserve Bank published a working paper a few years ago, and a group at the UN University did a similar study, analyzing whether government spending adds to the economy. If the multiplier is 1, it means that for every rand spent, you get another rand back. Under good circumstances—like South Africa in the mid-2000s under Mbeki and after Mandela—the fiscal multiplier was about 1.5. But as of 2018, it was negative. That means government spending was actually destroying value instead of creating it. The average multiplier over the last five years has been zero. That means it would have been better to burn the money than spend it as it has been..So, to answer your question, that extra money often goes nowhere. Some of it gets exported, some gets hoarded, and some is spent on consumer goods. But in terms of stimulating economic growth, it's having a negative impact..Alec Hogg (06:46.906):So, the BEE premium, which many people don't even know exists, is a real cost. The narrative is that BEE is good for uplifting black people, but in reality, as you've explained, we're paying 25% extra to a company with better BEE credentials. How prevalent is this in the economy? How much of South Africa's state spending is subjected to this 25% premium (for contracts under 50 million rand) or 11% for larger contracts?.Gabriel Crouse (07:53.558):The short answer is that almost all public procurement spending is affected by these BEE premiums, which total around 1.2 trillion rand per year. That accounts for about 15–17% of GDP—roughly a sixth or seventh of the economy. So, you could think of it as one day of the week..To further illustrate, the Treasury did a review of 1.2 trillion rand worth of spending since 2017, which showed that more than half of that spending—60%—was directed to companies that are 51% or more black-owned. This means that around 588 billion rand was spent on majority black-owned companies..If you look at the numbers: 80 billion in 2018, 72 billion in 2019, 90 billion in 2020, 94 billion in 2021, 101 billion during the pandemic, and 80 billion last year. This is just a fraction of the total government spend, and Treasury has only reviewed part of the full spending..Gabriel Crouse (10:16.31):By extrapolating the data, we estimate that since 2017, Treasury has spent about 3.5 trillion rand on majority black-owned companies. The idea that white monopoly capital dominates South Africa is now debunked. With 3.5 trillion rand already directed to majority black-owned businesses, the need for these interventions seems questionable. We're now at a point where relaxing BEE rules would encourage free competition, which would lead to better service delivery and cheaper prices for ordinary South Africans—especially at a time when we don't have the funds to continue paying extra for racial engineering..Alec Hogg (12:45.121):It sounds like a massive scam. If you were to take 3.5 trillion rand and apply a 25% premium, that's 800 billion rand. Meanwhile, the government is trying to raise VAT from 15% to 17% to cover a fraction of that 800 billion. Gabriel, this doesn't sound right at all. Why aren't we listening as a nation? The IMF, the World Bank, and others have made similar recommendations. Why are politicians not listening? Is it simply because their allies are benefiting, perhaps even funding them in indirect ways?.Gabriel Crouse (13:43.902):That's part of it, Alec. We track the involvement of politicians, their close relations, and business partners in BEE transactions. We have an investigation underway that will hopefully connect those dots in a more systematic way. But that's not the whole story. South Africa has a Government of National Unity (GNU), and we're facing the first budgetary halt in the country's history. This creates a great opportunity for parties like the Democratic Alliance (DA), Freedom Front Plus (FF+), IFP, ACO, and others to step up and say, "Let's be transparent about these premiums.".Alec Hogg (14:38.113):Mm..Gabriel Crouse (14:39.946):Treasury has never disclosed the exact costs of these premiums. We might imagine it's 25% every time, but it's probably not. Regardless, it's certainly billions—tens or even hundreds of billions—if you add it up over the years. We deserve to know how our taxes are being spent. The Constitution requires transparency, but when I've met with people from various political parties, I haven't gotten much traction..The second thing is to push for a reduction in BEE premiums to zero. Polling by the Institute of Race Relations shows that 70% of respondents, across all demographics, would like to see the BEE premium reduced or eliminated. This includes a majority of black South Africans..Alec Hogg (15:31.283):I wonder what's happening in the background. For people who benefit, this is a real benefit. For example, Black First Land First (BLF) is primarily based in the Eastern Cape and shares some of the same people involved with the ANC. It sounds like a big extraction, yet it's not being openly discussed..Gabriel Crouse (15:52.161):Indeed, and as much as we try to make the facts clear, we must acknowledge the power of the system. Politicians are not always keen to reduce something that's already benefiting their close allies, as you mentioned. But the hope is that through constant pressure, transparency will prevail, and in the end, people will begin to see the true costs of this premium..Gabriel Crouse (19:28.214):I think part of it is an understanding issue. I think keeping, getting the information out there, I think does help. It does take time to assimilate. I think people get confused between the difference between the illegal side and the legal side. Because one of the things that we hear is you are estimating, imagine if the premium of 25%, which is the cap, imagine if that was being spent every time. When I speak to some insiders in government, they say, you know, but it's not really the cap that's being spent every time. Part of the reason is that companies have already run away that wouldn't be able to compete on BEE points. So you're not seeing that thing in the procurement numbers. Part of the reason is that sometimes the best, cheapest business is majority black-run. So, you know, even if you had no BEE premiums, the black-run business would be getting the thing. So you're not seeing a cap. And sometimes it is 25%..And sometimes it's 50% or 100% or these markups that kind of don't even fit within the system. I think a lot of people really want to go after the corruption. And I think in that sense, the ANC has set the agenda by saying corruption is the problem and making it sound as if corruption can be solved if we just have one more sort of moving speech coming from one more charismatic politician. It's like this time we're feeling, okay, like some rugby moment is going to bring us all together and stop us from being corrupt..That's the feeling that I get. I debated this issue with the former head of StatsSA and Matthew Parks, COSATU's main spokesperson, just two days ago on Newsroom Africa. They both gave this impression, corruption is the big problem. That's why BEE is not working. But how are you going to solve it? Well, they want to keep the policy. Let's just get more inspired about how we deal with corruption. And unfortunately, I think the opposition is a little bit stuck in that same framework of like going after corruption and being afraid of connecting BEE and corruption..Because there's a wrong way to do that. There's a very wrong way to do that, to make that connection. The right way to make that connection is the way the Zondo report makes that connection. And if they follow that lead, and they follow the lead of the World Bank and IMF and those who have meticulously tread this path, I think there's a very clear and winning argument to be made. But it does take a bit of understanding, a bit of readjustment. Don't just straightforwardly go after corruption..Gabriel Crouse (26:54.89):Because there are real policy issues that program for corruption. One of the examples I like going to is the United Kingdom. Let's say 250 years ago. It forbade the sale of linen from Belgium, from the Flemish parts of Europe. It forbade the sale of porcelain as well from coming in. The Corn Laws, you know. And at that time, British officials were notoriously corrupt..They had stupid laws that were programmed for corruption. They then cancelled those laws and the corruption reduced significantly to the point where their officials, let's say in the early 19th century, had the reputation of being the most incorruptible in the world. So there is a connection between the system you put in place. We know a lot of systems analysis in South Africa, but very little of the up-to-date nature. The system in place actually does impact the behaviour of people, because people….Chase incentives, and I think that takes a bit of understanding to shift one's mindset from this thing of just like corruption is bad and we must get rid of a few bad apples to, no, we actually have to change the system in order to make it possible for the limited resources of the NPA and of the procurement oversight teams to be able to make sure that the bad apples are removed..And that systemic change, that introduces transparency that makes it much cheaper and more efficient to clean out the bad actors. That's what the Zondo report is really focused on. And that's where we think the greatest gains are to be had. That's the winning ticket that we encourage the opposition to take up..Alec Hogg (28:42.364):Anyone who understands economics knows that human beings are driven by incentives. And if the incentives are skewed, we have many, many examples in history. Just have a look recently at Wells Fargo and the big disaster that happened there. And the incentive there was to open accounts. And as a consequence, this huge bank, one of the greatest banks in the United States, was brought to its knees because the people who worked for it were opening accounts in a corrupt manner..And here we have a state that says, no, it's cool. As long as the guys tick all the boxes, you can give them 11% more than you would ordinarily or 25% more if it's below 50 million. Those are huge numbers anyway, because that's the way that we do things in South Africa. So first things first. We could avoid the VAT increase simply by your numbers, simply by doing away with this.BEE premium. And that would mean reassessing the system that we have at the moment. Just to close off with South Africa's economy, how has it performed under this scenario? You did write in your report something that we haven't done anything since 2007, have not grown in real terms since 2007. What does that mean?.Gabriel Crouse (30:03.488):Yeah, it means, the World Bank highlighted that as their first data point in their report. So per capita, you look per person and you control for inflation, you peg yourself to a stable international currency. And then you look at what the economy's done and it has not grown at all since 2007. That's astonishing. I don't think you'll easily find another open democracy constitutional order that has that poor performance record..And you can't just say ANC, it's not just the party, because the ANC governed South Africa from '94 to 2007, and there was great growth there. It's a change in policy that we think is responsible for that, including the entrenchment of the BEE, which really kicked in in the late 2000s in a big way. The impact that that's had, I think, is most extremely seen in our unemployment numbers. Just about the worst in the world, probably the, certainly the worst in the world if you look at open democracies..Angola may be just ahead of us at the moment, but over 11 million people are unemployed in South Africa on the expanded definition, over 8 million on the narrow definition. And if you look at black unemployment, a former colleague of mine forced me to face this issue because I wanted to just abstract to unemployment overall. But he said, look at black unemployment, because the whole thing of BEE is supposed to be to help those people who got stuck in the shadow of apartheid. And it is true..That apartheid viciously and deliberately oppressed the majority of the population of black people on the basis of their race. That did inhibit people's opportunities, got them stuck in poverty traps. An open economy would release that, but that started to happen in the 2000s. But six million odd black South Africans were still unemployed in 2006, 2007. That number is now over 11 million. It is roughly a doubling..Almost a doubling of black unemployed people in a period where 3.5 trillion rand has been spent on majority black-owned companies just in the last six, seven years. So I think that the picture that that creates really is one of entrenched new privilege being defended and financed at the cost of people who found themselves stuck in the shadow of apartheid..Gabriel Crouse (32:29.394):And then find that shadow extended by a new series of bad rules. And I think that the picture that emerges from that is very gloomy. And I think it also does speak to an opportunity. You take the advice to make these BEE premiums explicit, even if you just do that first, the fact that it's so unpopular will drive them down to zero..Once they go down to zero, you've got extra money from saving the premiums. You've also got a lot of extra money from making the system transparent so it's much harder to steal. That extra money can go to improving the conditions required to allow for economic growth. And we think that the best way to do that, paying down the debt and cutting taxes, will really put people who are stuck in poverty-stricken conditions back into a position where they can work their way up. We think there's a huge appetite for that and that potential energy can be unlocked the moment we come to terms with this harsh reality..Alec Hogg (33:33.324):And just remember, there are those who have benefited from it, those who've been gaming the system, at the well, taking all the benefits away from the majority, from most people. It's quite a horrific number that you unpack there. And we haven't even got on to the point of BEE being a tax on investment. And heaven knows, if you want to ask someone to invest, you can't imagine..That they're to build a business or build a factory if they've got to give away 25% before they even start. It just doesn't happen. Gabriel Crouse is a fellow at the Institute for Race Relations. Thanks for unpacking all this for us, Gabriel. And I'm Alec Hogg from BizNews.com..Read also:.FMF's Van Staden: Bravo Afriforum (and Pres Trump); maybe ANC will now repeal 142 racist lawsBN Briefing: V Staden, Roets – Why Race Law fight went global; Trump dumps UkraineMeet Dr Ernst Roets – Afrikaner 'troublemaker' who says SA deserves better

A R150bn annual ‘bonsela’ for elites gaming SA’s ludicrous BEE laws

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